It is a given that home buyers and investors alike borrow money when they make a property purchase. The term used to refer to the relationship between the value of the loan and the value of the property expressed as a percentage is loan-to-valuation ratio.

While borrowing is a given, what is less clear-cut is what percentage of the value of the property purchasers should borrow. In this day and age, with the hindsight that has come with the sub-prime mortgage crisis, do purchasers need to be less ambitious?

For a long time, in most places, buyers were able to buy a property without saving a deposit by borrowing the full amount of the purchase price plus acquisition costs– a loan-to-valuation ratio of over one hundred percent, sometimes up to one hundred and twenty percent.

At the time, it was a good idea for many people, especially since in Australia, such loans mostly went to DINKS (double-income-no-kids) whose capacity to pay looked good – and they were able to get into the market sooner and so buy at current prices. In other words they saved money on the purchase price in a rising market; waiting would have meant a higher purchase price for their home. At the same time, the rising market meant they were unlikely to default on their loan even if they were forced to sell unexpectedly, as they were likely to sell the property for more than they paid for it.

In the current less buoyant market where prices are static at best, anyone borrowing more than their capacity to pay the interest rate is likely to come unstuck if their circumstances change. And why overreach themselves anyway, since in a static market, with no upward pressure on prices, the time used to save a bigger deposit is not likely to result in the purchaser paying a higher price?

There is no ideal loan-to-valuation ratio that will minimise risk while maximising investment potential at all times and for all people, but purchasers deciding how much they want to borrow need to consider their ability to pay even if circumstances change – for example a job is lost or interest rates go up.

As with most decisions to be made in the course of buying a property, the risks and benefits associated with high and low loan-to-valuation ratios vary according to individual financial circumstances and the state of the property market at the time of purchase.

In the macro economic atmosphere that has come about as a result of the sub-prime mortgage crisis, it is also worth reflecting that, on the micro level, behind the technical jargon and statistics of the sub-prime mortgage crisis, each loan default represents ordinary individuals whose lives have been thrown into turmoil because of unacceptable levels of risk.